The shipping blues

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Melbourne and Adelaide are slugging it out for the
navy's $6 billion destroyer contract, but could a top-notch
American shipbuilder win the contract? David Elias
investigates.

A new generation of warships is about to go up on the
shipbuilders' slipway, but which slipway remains a tough call for
the Federal Government.

The navy's three new air warfare destroyers will be crammed with
technology so sophisticated that some experts have questioned the
Australian defence supply industry's ability to do the job.

The Williamstown dockyard operator, Tenix Defence Systems, has
an exemplary record after delivering 10 Anzac-class frigates to the
Australian and New Zealand navies on time and on budget, but the
electronic system integration in the destroyers takes technology to
a new level.

The Victorian Government is as eager as Tenix to win the $6
billion contract. It is streamlining the planning processes and,
along with several unannounced sweeteners, it has offered $20
million to set up a naval shipbuilding college at the dockyard. It
is an inspirational move that could get Victoria's defence industry
over the line against an opposition that has grown more formidable
as the contest has progressed.

It was originally a two-way battle between Victoria and South
Australia but a US contender has been allowed to submit a bid and
the Federal Government has allowed it to stay on the table.

When it comes to a track record, Northrop Grumman Ship Systems
has it all over the local bidders, especially the Federal
Government-owned Australian Submarine Corporation, which built the
embarrassingly defi- cient Collins-class submarines.

Northrop Grumman has been building destroyers for the US Navy
for more than 30 years. Its current contract for four Arleigh Burke
DDG- 51-class Aegis ships will bring its total output of destroyers
to 60 and its overall count of surface warships to 86.

Its shipyards in Pascagoula, Mississippi, pioneered modular
fabrication and assembly-line construction techniques that have
enabled the destroyer program to incorporate new and increasingly
complex technologies as they became available. The current
generation includes the Lockheed Martin Aegis combat system, which
brings together a variety of state-of-the-art functions covering
ship command, communications, radar, sonar and weapons for short,
medium and long-range warfare.

Australia's new destroyers will be tailor-made to Australian
naval requirements but based on one of three competing designs,
including one by Gibbs and Cox, the US company behind the Arleigh
Burke project. As well, it will incorporate some or all of the
Aegis suite so that our tiny navy can go into battle alongside the
US navy on proportionately equal terms.

It makes Northrop Grumman an attractive, cost-effective and
comfortable option for the Government that prompts the question;
why should Canberra even consider having the three destroyers built
locally? Politics demands that Australia's defence capabilities
remain self-reliant, while the spending of such a large amount of
taxpayers' money requires that preferential treatment be given to
Australian industry and Australian workers for the benefit of the
nation.

As well, there are other economic imperatives that should mean
the job stays in local hands, not least the need to raise local
skills to the level of the best in the world.

It is almost impossible to pinpoint the size of the Australian
defence industry because it is constantly changing as contracts
come and go. Recent surveys show that defence work is worth nearly
$5 billion a year and involves nearly 300 core companies employing
up to 15,000 workers.

As well, the industry can use up to 1300 subcontractors when it
is working on big contracts such as the Anzac frigates or the air
warfare destroyers. About half is based in Victoria but again the
figures vary. The Australian Industry and Defence Network (AIDN)
Victorian executive officer, Sue Smith, says 180 member companies
contributed to the $5.6 billion Anzac frigate contract but a study
of the 15- year project by industry consultants Tasman Asia Pacific
found it involved 620 Victorian companies, mostly small to medium
enterprises.

The study was commissioned by the Australian Industry Group and
attempted to compare the economic value to Australia of the locally
built frigates with the cost had they been bought off the line
overseas. It concluded that building them here had added $3 billion
to Australia's gross domestic product, enough to cover the cost of
the Darwin to Alice Springs rail link, fund the equivalent of
18,000 aged care beds in regional Australia and the full package of
education initiatives and capital works announced by the Victorian
Government in one of its bigger years. It found the project had
generated the equivalent of 7850 full time jobs, reducing social
security payments by $66 million a year.

It said that for each additional $100 million spent on the
frigates it generated a $195 million increase in national output
and 1022 jobs in Australia. These benefits should continue through
the 25 to 30-year lifespan of the ships.

Tasman Asia Pacific said companies involved in the project
became more innovative through their own research and development
and through access to overseas technology. They improved their
business practices, increased export opportunities and acquired
capabilities that have allowed them to play a greater role in
Australia's national security.

"The Defence Department has demanded high standards from its
main contractors who have expected the same from firms along their
supply chain," Tasman Asia Pacific said.

"Companies have adopted new and better practices, resulting in
substantial improvements in the quality of their processes and
products, increased sales, higher productivity and the development
of a culture of continuous improvement, all drivers of growth and
improved living standards."

And because the Defence Department could now rely on local
sources for repairs, maintenance and spares, the report said, it
would improve repair turn-around times and cut costs by up to $520
million  better than half  over the life of the
ships.

So where is the problem? The Victorian Government and the local
defence industry believe there is no problem that cannot be
overcome and that the air warfare destroyers, if built in the
state, will help the industry build on its skills, practices and
knowledge base, resulting in even greater economic and social
benefits.

The Melbourne economic and policy consultancy ACIL Tasman found
otherwise. It suggests the procurement of overseas systems will
leave the local electronics companies with insufficient incentive
to extend their investments in skilled people and sophisticated
processes so they remain up to the mark as defence information
capabilities develop.

ACIL Tasman was commissioned by the industry, the Federal
Government and five mainland states to study the defence supply
industry's performance and ability to meet the requirements of the
Defence Department's capability plan for the next 10 years.

Its report last November said most of the product supply
companies were healthy, profitable and had sufficient investment
incentives to meet defence requirements. Middle-range companies
were able to deliver projects on time and to cost and were
successful in exporting niche products.

But among prime contractors for larger, more complex electronic
projects, there appeared to be concentrations of poorer
profitability and because of their central position in the defence
supply chain they could affect the entire industry's ability to
meet future defence needs on time and on cost.

Data about their profitability was inconclusive, company-based
research and development was too narrowly focused and there was
insufficient interaction between government laboratories, companies
and universities via co-operative research centres, research
agreements and research alliances.

The report said Defence and industry needed to strike the
appropriate balance between access to overseas technology,
particularly American, in this area and investment in developing
indigenous intellectual property. It said a concerted effort was
needed from Defence and the companies involved to develop more
flexible collaborative arrangements to identify and share technical
risk and align industry capacity with strategic planning
requirements.

Victoria believes this has already been achieved. The State
Government's own report by the Allen Consulting Group points to the
alliances the Williamstown dockyard has formed with Lockheed Martin
and the German ship builder Bloom + Voss during the Anzac frigate
contract.

The Aegis combat system will be delivered in the form of a
"black box" supplied on a government-to-government basis. None of
the inner workings will be released to Australia and any
modifications to Australian specifications will be carried out by
Lockheed Martin in the US.

Allen Consultancy, in a study commisioned by the Victorian
Government, says the Aegis's integration with the numerous other
systems in the destroyers will be a major task representing a
significant challenge to the local electronics industry. However,
much of the work will devolve onto the shipbuilder and the
consultants believe the job is well within Tenix's
capabilities.

According to Sue Smith at AIDN Victoria, most of the state's
defence industry involved such companies specialising in niche
market componentry and electronics.

"I think it is important that the air warfare destroyer contract
goes to Tenix because of the sheer size of the capabilities that we
have in this state," she said.

"Realistically most of the componentry can be made in Victoria
and trucked to Adelaide. It will cost a bit more but not markedly
so.

"But there is great concern in the industry that the jobs might
go to an overseas builder.

"Critical infrastructure will be lost if those ships go
offshore. I cannot see how the shipping industry can keep going if
they do not have this project on their books."